China's 'Dash To Natural Gas' Bolsters U.S. LNG

A man walks between buildings in a shopping mall in Beijing on January 19, 2018. China's air quality improved across the country in 2017, the environmental protection ministry said on January 18, 2018, after the problem was so dire in previous years that some periods were dubbed an 'airpocalypse'. The average level of PM2.5 particles -- which penetrate deep into the lungs -- in 338 cities stood at 43 micrograms per cubic metre last year, falling 6.5 percent year-on-year, according to a ministry statement. / AFP PHOTO / GREG BAKER (Photo credit should read GREG BAKER/AFP/Getty Images)

In the past decade, China's natural gas consumption has almost quadrupled to over 25 Bcf/d, or about a third of what the U.S. uses. China is the largest incremental gas demand market and will account for 30-35% of all new gas demand in the years ahead. China wants gas to account for 10% of its energy by 2020, up from 6.5% last year. This year, China's gas demand should grow 16-18%, which is about the level needed to meet government goals.

With a still maturing market, China's gas potential is simply staggering. Let's run the crazy numbers. The average Chinese uses just 20 cubic feet per day, compared to 230 cubic feet for the average American. So let's put it this way: if the Chinese ever start consuming gas like we Americans, the global market would explode by 294 Bcf/d, or a whopping 85%. Production wise, this would require an additional 14 Marcellus shale fields of new gas! This explains why the most vital global energy question will remain: got gas?

The China and natural gas story has a simple message: the more developed a country becomes, the more that country's energy demand structure evolves, and the more that country turns to the modern fuel of gas that lowers emissions. With 85% of the world's population living in still developing nations, it's no wonder then that the future of natural gas shines so bright.

China's energy demand structure is still evolving, so the upside for natural gas is massive.Data source: JTC

Yet, despite domestic gas production doubling in the past decade, a chronic shortage of natural gas is hampering China's goal to use more gas, as seen this winter when prices spiked from freezing temperatures: LNG prices rose to a three-year high of more than $11 per MMBtu at the end of 2017. Even though China Gas seeks to add 6 million households to its networks from 2017-2019, more than its competitors combined, the extending gas reach is clearly not enough for this country of 1,400 million people. Hundreds of millions of Chinese still have inadequate access to gas.

Increasingly, a pipeline dearth often means that gas must be imported via LNG, especially since the population centers are in east along the coast. LNG demand increased 33% in 2016 and surged 50% last year, and China overtook South Korea has the world's second largest importer after Japan. China’s 17 LNG receiving terminals in 14 ports took in over 5 Bcf/d, although less than half of Japan's intake of 11 Bcf/d. I think China could overtake Japan by the mid-2020s.

Yet to be sure, Australia and Qatar will remain strong in the Chinese LNG market. The Aussies, however, confront domestic supply shortages and huge cost overruns, while Qatar's own domestic gas production has doubled since 2010. And in reality, China's multi-layered gas import strategy really means that there's room for numerous suppliers in China. In 2017, the U.S,. exported 710 Bcf of LNG, with China importing 15% of that. And no doubt that the U.S. will increasingly be able to supply China with gas. Our liquefaction capacity is set to grow from 1.4 Bcf/d at the end of 2016 to 9.5 Bcf/d by the end of 2019.

Combined with the tightening U.S.-China oil link, the emerging U.S.-China gas link is sure to be one of the main energy stories of the next decade. Given China's huge need for incremental supplies of oil and gas, our rising ability to export both will put us back in the geopolitical and economic driver's seat. And it's a way to offset the wide trade imbalances between the two countries, climbing to a record gap of $375.2 billion in China's favor last year. In May, the "U.S. and China recently agreed to a major LNG trade deal, which could generate $26 billion annually for America."

U.S LNG will also be a way to buffer Russia, who has long had its sights on the huge market in China (Power of Siberia pipeline flows are expected to start in December 2019). Officials in China know that energy relations with Russia impose high political and geopolitical costs on countries and customers. The U.S. doesn't have the baggage, so China's gas players want to strike more deals with our producers, both spot and long-term deals. Just another reason why some of our tariff and trade war talk hurts our "energy dominance" goals.

But, the biggest global gas development in the years ahead might center on the question of whether China can develop its leading recoverable shale gas reserves, an EIA-reported 1,115 trillion cubic feet. Know that today, the pipeline dearth, difficult geology, price controls, over influence of state-owned enterprises, and water shortages are the main issues blocking China's own shale revolution. China's dependence on imports for 40% of its gas use will increase.